Alternative financing, occupying a highly lucrative financial grey area, is a concept alien to those who never need it, and a lifeline to those who are sometimes forced to rely upon it. Passing through the streets in most urban areas, you’ll see an array of shady-looking businesses with payday loan signs in their windows, promising cash advances. They’re positioned alongside the bail bondspeople, pawn shops, and other trades that prey on the financial underclass, taking advantage of those in strapped financial positions who can’t easily access funds in other ways, and aren’t in a position to negotiate.
As an added benefit for the companies making vast sums in this industry, many of the people it takes advantage of lack financial literacy. They have limited access to training and education that would help them identify the problems with the deals they’re being offered, and they don’t understand how to negotiate fairer terms. They’re in that position because they’re growing up in a culture where they are devalued; their schools lack even the most basic of funding to provide core curricula, let alone opportunities for financial literacy education. They may have dropped out of school at a young age, or done poorly in school as a result of learning disabilities, mental illnesses, and other issues that went undetected.
Even if they had the financial literacy to identify the problems with the kinds of financing options that are readily available in their neighbourhoods, they might not have the tools to make different choices. Mainstream banks don’t lend to people with little to no credit history, limited assets, no real financial footprint. They argue the risk is too great, and it doesn’t make sense to extend loans to people who are highly likely to default.
Leaving a shadow economy to fill in the gaps, providing people with money when they need it. Alternative financing takes a variety of forms, and many reformers argue they are all exploitative, calculated to strike people at their most vulnerable and take as much as possible from them. Identifying the problem is the first step; the next problem becomes the development of a solution.
As tempting as it is, simply outlawing alternative financing isn’t the solution, for a whole host of reasons. One is that when you outlaw something, you don’t take the market for that product away. Low-income people will still need financing and will still seek it, which means that other lenders will spring up to fill in the gaps. Whether they find loopholes to use in a quasi-regulated industry or offer loans in shady under the table deals with no opportunities for monitoring or enforcement, they will continue to operate, and the core problem won’t be resolved. If anything, outlawing would make the problem worse, because it would be harder to track the alternative financial industry, and harder still to measure its impact on communities.
People need access to credit and finance, in this world, and removing access doesn’t change the core problem. Residents of communities where these kinds of financial activities are the predominant way to access credit are often well aware that it’s damaging their communities and harming residents, but they don’t have realistic alternative choices. If they did, they would use them, because most people don’t enjoy paying stratospherically high interest and struggling to keep up with payments from an alternative lender. They’d much rather access credit with favourable terms and a realistic payment plan that they can actually hope to follow for the life of the loan.
We also live in a nation that prides itself on free enterprise and the function of a capitalist system, which means that realistically, any attempt at outlawing alternative financing is going to go over like a lead balloon. Too many legislators would be able to retreat behind the free market angle to refuse to support drastic reform; as it is, they resist even the most basic measures to bring the industry in check. The fact that some may directly benefit from alternative financing means they’ll be eager to find a way to keep the system intact, or to defang any proposed legislation as much as possible.
Developing a solution to the alternative financing problem involves looking at what is driving people to it, and developing a way of meeting that need. Medical bills, for example, are a substantial component of expenses, especially since it’s becoming very hard to declare bankruptcy over extremely high medical bills. High rents are another issue; rent is making up a growing percentage of total monthly income in many regions of the world, and that’s non-negotiable for people who need a place to live, and want to be able to house their families with them. Both of these issues can drive people to payday loans, cash advances, and other tools in an attempt to make a payment. It may be an emergency that the debtor pledges to avoid in the future, but that’s not always possible.
Addressing the rising cost of living by increasing wages to make the wage more livable or taking other measures to control costs, such as enacting aggressive rent control, may be an important part of the picture. An actual functional reform of the health care system in the United States is also obviously key, as it’s the only way to control medical bills, in addition to ensuring that people get prompt care at the early onset of illness, rather than after they’ve been ill and are driven to the doctor by the severity of the symptoms.
Proving community opportunities, too, may be key, whether it’s support as people start their own businesses or training programs to help people develop more lucrative marketable skills. Treating communities of low-income people as holdalls for rejects and throwaways has a profound impact on these communities, and pretending otherwise is foolish; acting like the problem here is that people are resorting to alternative financing, rather than being forced into exploitative loans, is equally foolish.